FBI Saw Mortgage Crisis Coming, Didn't Stop It

The LA Times says that FBI agents told reporters that low interest rates and “soaring home values, [were] starting to attract shady operators and billions in losses were possible.” According to the report, Chris Swecker, the FBI official in charge of criminal investigations, told reporters that the FBI thought it was going to prevent a crisis similar to the S&L debacle.

From the LA Times:

“It has the potential to be an epidemic,” Chris Swecker, the FBI official in charge of criminal investigations, told reporters in September 2004. But, he added reassuringly, the FBI was on the case. “We think we can prevent a problem that could have as much impact as the S&L crisis,” he said.

Of course, we all know how well they prevented the (still on-going) mortgage meltdown. What happened?

Most observers have declared the mess a gross failure of regulation. To be sure, in the run-up to the crisis, market-oriented federal regulators bragged about their hands-off treatment of banks and other savings institutions and their executives. But it wasn’t just regulators who were looking the other way. The FBI and its parent agency, the Justice Department, are supposed to act as the cops on the beat for potentially illegal activities by bankers and others. But they were focused on national security and other priorities, and paid scant attention to white-collar crimes that may have contributed to the lending and securities debacle.

Now that the problems are out in the open, the government’s response strikes some veteran regulators as too little, too late.

Swecker, who retired from the FBI in 2006, declined to comment for this article.

But sources familiar with the FBI budget process, who were not authorized to speak publicly about the growing fraud problem, say that he and other FBI criminal investigators sought additional assistance to take on the mortgage scoundrels.

Uhhh what would the do to stop it? I guess warning people against taking loans above their means would be a good step… OH WAIT, that’s common knowledge. I guess they could have shut down the whole lending sector just to be safe!

Ever since the boom kicked in during the early 2000s I saw lots of stories warning people about shady lending. Can you really stop people determined to get screwed over buying a house in the end?

@rainmkr: They needed to enforce the laws already on the books. A lot of people are talking about writing new laws and new regulations, but that won’t fix things if the existing regulations are not enforced.

“The FBI and its parent agency, the Justice Department, are supposed to act as the cops on the beat for potentially illegal activities by bankers and others. But they were focused on national security and other priorities …”

@rainmkr: Why yes, yes I do think if we had not had a hand picked DOJ full of Bush loyalist something might have actually happened a few years back before it got worse.

This was ignored because they didn’t want to inhibit business even if it was illegal as long as someone wearing a suit was making money at it. They were also too busy trying to figure out what party various lawyers were aligned with to pay attention to real crime. I’m sure the whole security theater nonsense was a major time waster on top of the rest. I am really disgusted at the dysfunctional mess that has been created in the last 7+ years.

@Consumerist-Moderator-Roz: This subject is completely political. Senator Lindsay Graham snuck an amendment into a bill, expressly deregulating ‘Structured Investment Vehicles’ and expressly keeping them from either Federal, or State regulations. This was specifically our Federal government’s answer to the FBI’s query. The media (Average college GPA of 2.5 .) reported shortly after with lots of stories covering the shortfalls of the FBI’s budget. Make no mistake, it was our political government that opened up the flood waters for this catastrophe and it is just that. Since personally I’m against both political parties, I’m not advocating either side. Actually I do advocate Independence. There are so called ‘people in the know’ who would love nothing more and do try to make this a ‘complicated subject’, sorry it’s not. Convoluted yes, but not complicated…[en.wikipedia.org][www.investopedia.com][www.govtrack.us][lgraham.senate.gov]

In a world when the interwebs continually bemoans the excessive power of the FBI, CIA, federal government, and so on (right and left), is anybody implying that they _want_ the FBI to have the power to control … the mortgage industry?

This is a stupid article to post if there are comment limitations on getting “too political,” because politically, the FBI has no right to control any mortgage industry or even to crack down on shoddy lending practices which were entirely promoted by certain political bents to increase home ownership… which, of course, had the reverse effect of leading to this foreclosure mania. What is now known as “predatory lending” used to be called “access lending,” something that was supposedly an act of crato-charity to extend the possibility of home ownership to people who could not own homes financially… of course they foreclosed, it was the most obvious thing ever. You don’t need the FBI to tell you that somebody who does not make enough money to afford a mortgage cannot afford a mortgage. Now that hundreds of thousands of low-income and middle-income families have forclosed on homes that they could have never owned, it’s predatory, 10 years ago, the practice of extending loans without income validation and to families that obviously did not make enough money was considered “social justice.” For the FBI to have stepped in anytime in the last 10 years and intervened with a process that was supported widely by one political party and supported slightly less widely by the other (although, it was more or less apathy), FBI officials would have been charged with overstepping their bounds (which it would have been), classism, racism, and so on.

Nobody should be responding with “let’s keep the Partisan comments to a minimum,” when this is an entirely partisan article. “Veteran regulators” (I’ll give you two guesses to figure out which party that refers to) are charging that the FBI didn’t get enough funding. Um. The party of “veteran regulators” is also the party that, for the last two years, has controlled the area of government that approves funding for government agencies.

@MichaelBrazell: it’s not “overstepping their bounds”. they are the FBI & the DOJ – their central purpose is to investigate & prosecute the laws of the land. is it their responsibility to regulate banks? no – that would be overstepping their bounds. but what is the purpose of laws without the ability to enforce them?

is there really any point in blamegaming now, though? it’s like stumbling upon a sun-bleached carcass in the middle of the desert – the bones are already picked cleaned & the scavengers moved on long ago. what do you hope to find?

I don’t think the FBI is trying to control the mortgage markets. I got the impression from reading the article the other day that they were referring to rampant mortgage fraud which was made much easier by the sheer volume of mortgages being processed and how easy it was to dupe unsuspecting lenders, buyers, appraisers, et al, with all the money being made in the (semi) legitimate housing markets.

F-R-A-U-D is a CRIME! Real estate professionals — including mortgage
brokers and loan officers are regulated by a varying patchwork of state
regulators and peer review boards, which obiously, were not effective. We
need NATIONAL standards and regulation of the real estate industry. Those
standards should require initial and ongoing criminal background checks. A
couple of years ago, I was shocked to learn of an individual who was working
as a mortgage broker when he was arrested for forging loan documents to give
himself a loan, the BONUS: this guy had a criminal record and had already
been convicted and served time for fraud. Mortgage brokers and loan
originators get all of the information needed for identity theft during the
application process AND they are compensated based on the quantity of loans
originated NOT the borrowers ability to re-pay nor the accuracy of the loan
application. Fraud goes where the action / money is — like flies to poop.
So, when the real estate boom happens, all the lowlifes jump into real
estate. Unfortunately, HONEST and experienced real estate professionals
whose careers have spanned multiple boom / bust cycles are perhaps the ones
most hurt by the piling on of criminal fraudsters. When we start seriously
prosecuting white collar criminals instead of slapping their hands and
sending them to hang out in country club “prisons”; and when we STOP them
from ever “working” in positions which provide them with more opportunities
to victimize, and when we have effective regulatory oversight to prevent and
catch fraud EARLY, then maybe we’ll slow down the pace of these fraudulent
criminals.

It is easy to pin the real estate crisis on ignorant borrowers who should
have known better, but you better enjoy that feeling of smug superiority
while you can; the fact that you weren’t dumb enough to be lured into a
high risk mortgage won’t be much comfort when your neighbors’ homes go into
foreclosure and your property value plummets. We are ALL going to pay
dearly now and for the forseeable future for this lack of oversight,
regulation and enforcement; let’s hope that THIS time we hold those who
committed criminal and fraudulent acts accountable and punish them
accordingly.

The only thing the FBI could have pursued was flat out fraud-not shakey practices,not shady practices,not even unethical practices.The only thing the FBI could have pursued was a crime that crossed state lines or violated civil rights.

I know,it sounds like we were violated,lost our civil right to honest and ethical brokers.But alot of ‘experts’ missed this as well.Where were the Jim Cramers back in 2004.Where the business reporters raising questions like if a mortgage should be no more than 3 times your yearly salary where the heck is the money coming from.

@u1itn0w2day: And there was plenty of outright fraud out there that ran rampant exactly because the FBI was distracted. Criminal organizations were recruiting strawman buyers, paying off crooked appraisers and loan officers, and even resorting to good ol’ fashioned legbreakers to buy a property, inflate its value, refi, then run off with the loan proceeds, leaving the bank and the strawman holding the bag.

Here in Atlanta over half the units in a condo development were flipped this way by the same group of criminals, resulting in legit buyers paying over 3 times current value after all those units were foreclosed on.

This sort of outright theft is EXACTLY the FBI’s sweet spot, but they were too busy chasing Steven Hatfill around to care.

@rainmkr: I think they’re talking about the people who aren’t following the rules. Things like swapping one paper in the contract for another after it’s been signed and stating the payment but failing to mention that that was just the interest and you’d have to pay more than that to pay anything off on it.

Basically people who lied and tricked. Not the people who made bad decisions where the banks played by the rules.

This is why you watch where the money goes. It’s rather like water, it always takes the easiest, shortest way.

When the dot-com bubble exploded the trend obviously was towards mortgage and leverage buyout markets. it moved so fast, the feds saw it coming, but was mired so much paperwork they could not get a Finding forged quick enough before Countrywide collapsed.

If the FBI knew about it, why didn’t they contact the SEC on this matter, handing the data over to them? That’s easy enough to answer: Pride and glory of the Big Bust. The FBI is not set up to deal with financial crimes of this kind and magnitude. Yeah, they tangled with the Mob and got their monies, but that was simple in comparison to dealing with the bigger operations. The SEC brought down bigger ones like Milliken and his Junk Bonds markets (IMHO, looks rather good right about now), searing and siezing millions of dollars.
You know the only major bust the FBI had that was directly linked with the financials was? Al “Scarface” Capone for Tax Evasion. Fer few outside the Mafia busts after that.

ummm, the FBI works for the government, which in turn works for the very very rich and powerful. The very very rich and powerful PROFIT from things like wars, economic downturns, economic upswings, housing crises, etc etc. Especially when they SEE THEM COMING

When those equity mortgage loans, ARMs, no-assets-needed mortgage advertisements first appeared in the afternoon along side the injury lawyer ads is when I knew there was going to be big trouble.

Say what you will when it comes to personal responsibility, but people who had no business buying a house were targeted. There was too much money to be made in binding their high risk loan into a AAA bond and selling it to the big banks. People who’s credit worthiness wouldn’t allow them to rent an apartment were able to buy a house during the mortgage hay-day.

Criminals were involved at some levels, but the average businessman along every part of the mortgage chain were as much to blame. The money was to quick and easy not to turn a blind eye.

1. FRAUD — it definitely happened, and it was made easier by the lack of NATIONAL licensing standards for the individuals originating & processing the loans. Even if the FBI had focused only on the largest lenders operating in multiple states, they could have dramatically slowed the “boom” and reduced the duration and intensity of the ensuing “bust”. Unfortunately, when poor, uneducated, ignorant souls were being taken advantage of and losing their homes, there was silence where the public outcry should have been; but those poor folks were the canaries in the coalmine. See Washington Post May 30, 2005: A Bane Amid The Housing Boom…

2. Non-traditional Mortgages: ARM, Interest Only, Sub Prime, No / Low Doc, $0 down with Cash Back. These loans were more difficult to understand and allowed unqualified borrowers to enter the market without putting “skin in the game” in the form of down payments.

3. APPRAISERS gone wild

4. UNDERWRITING, a complete lack of: This should have been where unqualified borrowers were rejected for loans.

5. FORECLOSURES — This is what makes me, personally, most angry even though I am fortunate enough to have a fixed rate on a house in a neighborhood that is weathering the real estate crisis quite well. As the wheels were coming off the bus, most lenders refused to even consider loan “work outs” with their borrowers — preferring instead to foreclose. If a borrower is making payments on time each month and has stable employment / income, but suddenly has problems when the payment drastically increases; then the lender should work out terms that the borrower can meet, e.g. smaller payments over longer periods of time. The lenders, high on the housing boom, thought they could MAKE money taking the houses back. Or maybe they figured, worst case scenario is that government bails us out. These lenders should not be able to get off with an “OOPS! My bad” for, in essence, throwing water on a grease fire.

Oh I can imagine the FBI warning people.
FBI: Watch out for a mortgage crisis!
Democrats: How DARE you warn people from getting a home, even if the payments are above what they can afford! EVERY person has a right to a home!

Don’t believe me? When did the mortgage bubble blow up? 2006. When did the Democrats get control of the Houses and Senate? 2006.

It doesn’t matter what party is in the White House. This was clear as day since the Clinton administration. I remember having talks with people who kept saying the economy was hollow back in 1996 and it would be about ten years before anyone noticed. Lo and behold, those people were right. The booming economy of the 1990s were a bubble that popped in 1999 and people tried to support that bubble by throwing cash into it. The end result is you had a market full of bad investments! Why is the outcome a surprise to anyone?

The FBI had all the pieces to catch and prevent the 9/11 hijackers (e.g. illegal/expired visas, flying lessons without learning how to land, etc.). They also fucked up on the anthrax letters, *knowing* that they came from Americans and not Saddam, but did nothing about it.

Why should it surprise that those clowns did nothing about the mortgage fraud either?